Believe it or not, the fourth quarter is traditionally a slow period for the diamond trade. That may be a stark realization for some, especially on the eve of Thanksgiving weekend that signals the start of the Christmas shopping season. However, it’s worth stressing that it is a shopping period, and not a trading one. No well-run, efficient jewelry retailer will leave it until November-December to fill his stock for the season.
Rather, the diamond trade looks to Christmas, and the Chinese New Year for that matter, for an indication of what’s to come. After all, a good retail season should spur retailers to replenish inventory in the months thereafter. As one diamond manufacturer, who also has a jewelry wholesale business and a small foot in retail, told Rapaport News, “No jeweler ever wants to have an empty showcase, so they buy in anticipation of what they’ll need in four to six months.”
Those should be encouraging words for diamond manufacturers and dealers, who currently hold fairly large inventory. In truth, jewelers should be buying now for February-March, which they don’t seem to be doing. At least, assuming that jewelry retailers have a strong Christmas season, they should subsequently start buying loose diamonds from the trade in the first quarter.
However, forecasting inventory levels can be tricky and adjusting inventory in response to short-term demand trends has become more complicated the more volatile the market gets. Therefore, understanding the business cycle at every stage of the pipeline becomes vital to understanding one’s own inventory requirements.
De Beers touched on seasonality of consumer diamond jewelry demand in a recent Anglo American presentation to analysts. The company noted that approximately 30 percent to 40 percent of annual diamond jewelry retail sales in the U.S. take place in November-December, with steady demand spread over Valentine’s Day, Mother’s Day and the summer wedding season. China has peaks during the February Chinese New Year, and the May and October Golden Weeks, while sales in India are weighted around Diwali and the subsequent wedding season.
Accordingly, U.S. polished imports tend to peak in October or November – not accounting for the exceptionally large imports done in May for the JCK Las Vegas show, much of which is re-exported in June. In order to receive goods in October-November and give jewelers enough time to set those diamonds into jewelry for the season, jewelers need to make their orders four or five months in advance.
The same equation might be applied further down the pipeline. De Beers estimates that it takes about nine months from the time a rough diamond is extracted from the ground until it is available to be sold to the consumer. Of that, about four to five months are dedicated to the manufacturing and certification process.
Therefore, manufacturers are theoretically buying rough in May through July, in order to have their polished ready for jewelers on time around October. This year, manufacturers also accounted for a prolonged turnaround time for grading at the Gemological Institute of America (GIA). Regardless, De Beers largest sights tend to be around July. It’s not far-fetched to presume that jewelers place orders for polished in May (at the JCK Las Vegas Show), after which manufacturers buy their rough and ramp up manufacturing.
Of course, the market is more fluid than such theoretical models suggest.
Still, one can apply the same logic to prepare for demand in the Far East. With the Chinese New Year taking place on February 19, one expects Chinese retailers to take delivery of goods in the next month or two for that season – unless they’re sitting with sufficient inventory already.
Indeed, where Far East demand should currently be strong, the opposite is true, which may signal slowing consumer demand in China. Or, inventory levels are still full from buying earlier in the year. Certainly, this week’s earnings reports by Chow Tai Fook and Luk Fook Holdings suggested as much, with both the Hong Kong-based jewelry majors recording a slump in sales and higher inventory for the six months that ended September 30.
Chow Tai Fook’s inventory of raw materials for gem-set jewelry fell 9 percent during the six months, but its finished gem-set jewelry inventory jumped 23 percent. Luk Fook’s total inventory grew 11 percent.
Inventory levels are high across the pipeline as trading has been slow since April and as more goods that were stuck in the grading laboratories are being released to the market. Polished buyers are pushing suppliers to lower their prices as they recognize that liquidity pressures might force them to sell cheap to generate cash flow. Buyers are also prepared to wait.
They’re waiting to see if polished prices will soften further and if U.S. retailers will indeed have a positive Christmas shopping season that might stimulate dealer demand in the first quarter of 2015. Assessing the diamond trading cycle in the past two years, polished prices have softened in the fourth quarter and firmed in the subsequent first quarter, according to the RapNet Diamond Index (RAPI™).
That is likely to happen again this year. With realistic expectations for a positive holiday shopping period, diamond dealers have reason to hope that retail buyers will return to the market in the first quarter to replenish their sold off inventory. They may also simply buy in order to fill inventory to sufficient levels that will last the full year ahead. After all, with polished prices depleted and manufacturers under pressure, it is clearly a good time to be a diamond buyer in the next month or two – that is, at least, until the cycle starts all over again.
